FINANCE February 27, 2017February 27, 2017adminshare this
The recording of transactions in accounting books is generally done based on various methods, but Cash Basis of Accounting and Accrual Basis of Accounting are most commonly used. Every business records its transactions by using one of these two systems. There are many differences between these two systems and literally, they are treated as opposite to each other.This article concentrates on differentiating this two methods, read on till the end to find out more.
CASH BASIS OF ACCOUNTING
The word ‘Cash Basis Accounting’ itself communicates the meaning for a large extent. It is based on the recording of cash receipts and payments only. This method records the transactions of cash received or cash paid only after the receiving of cash or payment of cash. i.e, it does not record the transactions before receipt of the cash or payment of cash. This basis of accounting is not in compliance with the Generally Accepted Accounting Principles (GAAP).
Cash basis of accounting is generally followed by professionals like doctors, lawyers, charitable institutions, educational institutions, Accounting, etc. This Cash Accounting does not be able to provide the complete information regarding the business transactions and cannot be seen as a reliable source of accounting information.
ACCRUAL BASIS OF ACCOUNTING
The system Accrual Basis of Accounting is based on the concept that the transactions are recorded when some revenue is earned irrespective of cash received or not, same is the case with expenses, the transactions relating to expenses are recorded when the expenses incurred irrespective of the payment made for them or not. This basis of accounting is fully in compliance with the Generally Accepted Accounting Principles (GAAP).
The accrual basis of accounting is generally followed by business enterprises, corporations, etc. This method of accounting will provide complete information regarding business transactions along with the statement of profit and loss and balance sheet for ascertaining financial position of the organization.
ABC Ltd, sold goods of rs.5000 for Mr.X on 25-10-15 and payment received from Mr.X on 10-11-15.
⦿ Under the Cash Basis method, The revenue of Rs.5000 is recorded when the cash Rs.5000 received on 10-11-15.
⦿ Under the Accrual Basis method, The revenue of Rs.5000 is recorded when the revenue earned by goods sold on 25-10-15 irrespective of cash received or not.
CASH BASIS OF ACCOUNTINGACCRUAL BASIS OF ACCOUNTINGAccording to Cash Basis Accounting, Revenue is recorded only after payment received and expenses are recorded when payments are made.According to Accrual Basis Accounting, Revenue is recorded when earned irrespective of the cash received or not and expenses are recorded irrespective of the payments made or not. IncomeIncome or revenue is recorded when payments are received.Income or revenue is recorded immediately after the sale is done. ExpensesExpenses are recorded only after the payment is made for them.Expenses are recorded when incurred in the process of generating revenue. Compliance to StandardsCash basis accounting is not in compliance with standards of GAAP.Accrual basis accounting is fully in compliance with standards set by GAAP. Time requiredThe time required for recording of transactions is less in Cash Basis.The time required for recording of transactions is more in Accrual Basis. AccuracyThe income statements may not provide the accurate and complete information in Cash Basis because the expenses and revenues are not matched always.Accrual Basis method uses various accounts to record information which helps in providing complete and accurate information in income statements. Followed ByCommonly this method is followed by Professionals, Educational institutions, etc because of monthly transactions.Usually, this method is followed by business enterprises, corporate organizations, etc because of the need for cash and credit transactions. Receivables and PayablesThe Cash basis method does not record cash receivables and payables or uncollected payments.The Accrual basis method records cash receivables and payables in the balance sheet. Skills RequiredThe Cash Basis Accounting does not require any specialized knowledge to record the transactions because of simplicity in records.The Accrual Basis requires the user with specialized knowledge to record the transactions because it involves receivables and payables, adjustments, etc. ReliabilityThis method of Cash Basis is not reliable does not provide an accurate financial position of the business.Accrual Basis is considered as a reliable method because it provides complete information about cash transactions and credit transactions and provides accurate financial position of the organization.
By the above discussion, it is clear that both the methods have their own advantages and disadvantages but it is noted that many accountants like working in Accrual Basis Accounting because it gives a complete information and technical and scientific in nature and the reports prepared by Accrual Basis Accounting are useful to management of the organization for decision-making purposes and for doing business effectively.